Principle of set-off is when the mutual debt is from the litigating parties against each

other and the sum so due shall set off that much due from other party and only the
balance of the account is to be claimed or paid on either side respectively. The
defendant has the right to plead in when an action is initiated against him. The
plaintiff is liable in a present cause of action or recognized as the right or doctrine of
set-off. It was said in the court of equity that naturally justice and equity order that the
requests of parties equally indebted should be set-off against each other and only
the balance be recovered. A right of equitable set-off arises despite the fact that the
contracts are both silent on the matter. Equitable set off is more difficult to use in
practice than contractual set-off due to the element that the claims being set-off have
to be of the same nature both contractual and must be so closely connected that is
would be manifestly unjust to enforce one without taking the other into account.

There are few requirements that the court put in order for it to be set-off. For
example, the set-off should be against the complainant in the similar volume in which
he sues and the demands needs to be liquidated. Equity will accept a set-off where it
would be unconscionable to let one party to assert on its legal right without first
accommodating the other's countervailing legal right. Equity will sometimes allow
set-off otherwise than between the same parties where there is a particularly
compelling factor that makes reliance on separate rights unconscionable.

The current case law on the principles of equitable set-off are from Geldof
Metaalconstructie NV v Simon Carves Ltd 1 in which the Court of Appeal provided
guidance on the rules of equitable set-off. The parties contracted for the supply and
installation of pressure vessels by Geldof for a building constructed by Simon
Carves. The contract concealed a clause repudiating the remedy of set-off. Geldof
sued for the sale price, and Simon Carves now requested an equitable set off of
remedies for repudiation. The judge had put the question as that it was for Simon
Carves LTD to proof that there was an ‘inseparable connection’ concerning claim
and counterclaim, and that it would be clearly unfair to allow the former to be
enforced without concern to the latter. He did not find that connection. It was held
that the appeal against summary judgment declining the right of set off succeeded.

In the case of Bibby Factors Northwest Ltd v HFD Ltd 2, concerns the amount to
which an assignee of dues is bound by set-offs happening among the assignor and
the debtor. It was summarized by the Court of Appeal that the debtor may proof that
the money claimed is not owing, in whole or in part, either because of some
fundamental defence or some right of abatement. Next, the debtor may require a
contractual right of set off. Furthermore, the debtor may have a cross claim which
equity will favor him as entitled to set off against the debt such that only the balance

1
Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667
2
Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908
may be claimed. Lastly, the debtor may have a cross claim which is independent of
the claim against him in the sense that it does not fall into the category of a claim
which forms the subject of an equitable set off. The test for equitable set-off was
satisfied.

In relation to equitable set-off, the relatively recent judgements of Hawes v Dean 3

shows that equitable set-off needs a correlation among the adverse parties' rights
which would make it unconscionable for one party to insist on its legal right without
first accommodating the other party's countervailing legal rights.

In Smith v Acquire Asia Pacific Philippines Inc 4 the dispute arising from Share Sale
and Purchase Agreement entered by the parties. Applicant agreed to sell to
respondent capital shares for consideration subject to adjustment in accordance with
sale and purchase contract. Sought interpretation for relevant provisions of contract
about release of escrow amount in applicant's favor. Respondent sought order for
equitable set-off in view of warranty and guarantee claims so as to indict applicant's
claimed rights. On face of contract, obligation satisfied by payment of full amount
and payment of any adjusted amount. The relevant clause made no provision for any
amount due by applicant to respondent to be paid out of escrow amount. That
respondent had no contractual right of recourse to escrow amount for any claim
against applicant.

To conclude, it shows that the court of equity being a court of conscience has to look
not at only the benefits of the plaintiff but also to the interest of the defendant and
grant relief to the plaintiff only on the condition that he is prepared to give to the
defendant what the latter deserves. The source of the doctrine is the interposition of
equity. This maxim draws a line between common law and law of equity.

3
Hawes v Dean [2014] NSWCA 380
4
Smith v Acquire Asia Pacific Philippines Inc [2016] NSWSC 1084